UWM Holdings Corporation Class A

Good morning. My name is Zen and I will be your conference operator today. At this time, I would like to welcome everyone to the UWM Holdings Corporation second quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Matt Roslin, you may begin your conference.

I am Matt Roslin, EVP of Legal Affairs and Investor Relations. Thank you for joining us and welcome to the second quarter 2021 earnings call for UWM Holdings Corporation. Before we start, I would like to remind everyone that the conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued this morning. Before introducing Matt, I want to inform everyone on the call that our CFO Tim Forrester cannot be with us today due to personal reasons. Matt Eshbia, Chairman and CEO of UWM Holdings Corporation, United Wholesale Mortgage, will be delivering both the business and the financial updates on today's call.

Thanks, Matt. Appreciate it. And thank you, everyone, for joining the call today. It's great to be here, especially after another outstanding quarter here at UWM. Before we start, I just want to thank our team members here at UWM, our partners throughout America doing great things, mortgage brokers, independents out there. Proud to partner with all of them. The second quarter... was our best quarter in company history from a volume perspective. So we're very excited about the results. Not only do we post record numbers for production, but we almost doubled our prior quarterly production on purchase loans. And that's going to make a big difference as we talk about later on. Purchase production is an important measure. I'm going to explain the details of how we think about it later on in this call. On our last Corey call, as I will do every time, let you know to hold us accountable to our numbers and what we say. We delivered above what we expected in many respects and excited for you guys to see the results and talk about what's going to happen in Q3 as well. We delivered $59.2 billion in production, beating our guidance of $50 to $55 billion. At the time when most of our competitors guided to do less and did less volume, our production was up over 20% at UWM compared to the prior quarter and resulted in an increase in overall mortgage market share by a significant amount at UWM. Our gain margin was 81 basis points in line with guidance and is actually lower numbers than historic year numbers. However, we posted a solid profit. We did over $138.7 million in net income. When I back out the $219 million decline of fair market value of our MSR asset, our core earnings, as I like to call it, was approximately $358 million. That's the way I run the business. I mentally add back or subtract, if it's positive, the change on MSR, really more representative of what our business is. The $358 million we're very proud of, and at the same time, We think of how to run the business to make sure that we deliver great earnings from an operating perspective at all times. And obviously, the MSR asset, we do not control the change in fair values, including impact of certain market assumptions. And to me, when assessing the health of our business, I like to move the changes up or down on a fluctuating asset that I can't control. We've already noted that on a sequential basis, our second quarter results represent a 20-plus percent increase in overall production. I think it was actually 21%. More exciting to me, though, was the 97% increase in purchase production over the first quarter. On a year-over-year perspective, Q2 looks great as well. We had a 90% increase in overall production and a 288% increase in purchase production. There's no mortgage company in America that has comps like this. We are the elite mortgage company in America, and we're proud to show it to you quarter in and quarter out. The second quarter was really interesting as it provided a glimpse into the future to our industry for a couple reasons. First off, the weighted average rate, 30-year interest rate, went to 2.99 from 2.80. So just about a 19-base point raise in rates, and you would have thought the whole industry shut down based on how a lot of people reacted. That was only a small raise in rates. Wait till it goes from 2.99% to 4%, and you'll see the strength of our business across the board. The relative refi mix declined, and purchase increased and became more important for mortgage originators. But purchase mix is not the thing we focus on. We focus on purchase production because purchase mix looks really great if your refi volume went down. UWM's refi volume actually stayed about flat, but we almost doubled our purchase business from $12 billion to $24 billion quarter over quarter. Some companies like to speak about purchase percentage or mix or really don't like to speak about it at all, but it's important to note that the purchase mix can solely change by doing less refinance. And that's really not the story we're trying to tell. We're trying to talk about the strength of our business, which is purchased business. And when rates go from the 2.8%, 2.9% to 3.5% or 4%, that's really when the best mortgage companies will shine. And we believe we are that company. Just like in 2018 or the first quarter of 2020, You know, you can see how people perform when the tide is out and not such frothy business. So second quarter, 24.06 purchase production, our best purchase quarter of all time, our best overall quarter of all time. And if you think about it, if you had no refi business, we'd almost do $100 billion of purchase business in a year, which by far and away would be the number one mortgage company in America. It's very important to understand this because our business-to-business model and history to prove that not only when we gain the purchase share, we retain it and maintain that business with our broker partners and our independent mortgage companies that we partner with. How are we growing in this market? Simple. Speed and service. Our cost structure allows us to be profitable with lower margins, but the reality is we're closing loans faster and more efficiently than anyone in America. Real estate agents love that. Our brokers love that. And that's how we continue to get more referrals and grow our business. Time kills deals, we talk about here at our company. It's never true to run a purchase business. Once a broker closes a purchase loan, they stay with us. They want to continue to send loans to us. And guess what? The realtors want to as well. We continue to close loans in 18 days while the industry is over 47 days. We're substantially faster than the market. Our client service remains best in class with our proprietary technology and uncompromising team members, proving our year-to-date net promoter at a plus 86.6%. While Q2 was a glimpse into the future with rising rates, we've seen rates drop a little bit in Q3, which means a lot of the heavy refi shops, our competitors, will be able to post decent numbers and better gain on sale margins in the third quarter. The reality is Q2 was a glimpse into the future and what this will look like in 2022, 2023, 2024, and UWM is the lead mortgage company. Now, I want to take a quick moment to talk about a quick update on the all-in initiative that we announced on March 4th. A lot of people, a lot of the media, like to spin things and say negative things about the all-in initiative, questioning the decision process. I want to make sure everyone understands that UWM is very in tune with our clients, and it's been an overall huge win not only for UWM, because that wasn't the focus. The focus was on the independent mortgage brokers and consumers. It's been overwhelmingly positive. We are very in tune with what our clients need. And, of course, media and our competitors love to spin the story, but the reality is this. Black and white numbers. UWM grew 21%, $49 to $59 billion, while one of our competitors, who is public, went down from $103 to $83 billion. Or in their partner network, Rocket Mortgage went from $41 billion down to $30 billion. It's not a discussion whether it was successful or not, and other people can spin what they want. It was an overwhelming success, not only because of UWM's growth and some of our competitors' non-growth, if you want to think of it that way, but the reality is this. The alignment of the broker channel from a culture, training, licensing, our clients are all in with UWM, and they're all in for the broker channel just like UWM is. And that day, March 4th, was a changing factor for all the independent mortgage brokers in America. And we're proud to have made that decision. That was very positive for the whole channel and consumers across America. You know, this year will be our seventh consecutive year being the number one overall wholesaler in the country. And we're very excited about the growth and continuing to lead the broker channel as a partner with so many independent mortgage brokers throughout the country. I'd like to summarize some of the production and look back on by saying that a solid foundation, strong and established relationship with our clients, exceptional service position, able to help us capture more market share in 2021 as we just did in the second quarter, but beyond going forward in the future. So we're very proud of where we're at. At the same time, we have a lot of other good things going on. So now let's talk about some other highlights. Return to work. So in June, we welcomed back a lot of our team members. By July 16th, we had all of our team members back here in Pontiac, Michigan. Our culture is more alive than ever. Our 200-acre-plus campus, we're excited to have all 9,000. We have our clients coming in. We have hundreds of clients coming into our office every week, flying to Pontiac, Michigan, to get trained, to get coached, to learn how to grow their business. As they grow, UWM will grow, and the broker channel will grow. And that's a big part of our story, and it's happening every single day. We continue to reinvest in our business and our people. We've built some proprietary technology. We'll save us over $8 million estimated this year on some proprietary things we've done with some docs, document generation and document storage areas that we've done. We've evaluated the feasibility, and we're looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments. That's something that we've been working on, and we're excited that hopefully in Q3 we can actually execute on that before anyone in the country, because we are a leader in technology and innovation. We remain committed to our 9,000 team members. We're creating the best environment for collaboration and learning and growth here at UWM. And in the third quarter, you're going to hear about some game-changing technology and innovation that we are rolling out. We're very excited. It's not things that other people have done. We're trying to be a leader, once again, as we have been for years. And we've got some big things that will be announced in the third quarter. With all that stuff, I'm going to shift, and as Matt mentioned, Tim Forrester, our CFO, cannot be available today for this call, but I will talk about our financials and go through some of the details about our financials before we wrap up and take questions. First thing, I'd like to start about our buyback. As announced in the last quarter, we were authorized by the Board of Directors to buy back shares. The exact details are in our filings, but in the summary, we purchased just under 800,000 shares in Q2. and a lot more since. If you add it all back, we've purchased well more than 2 million shares. And honestly, at these prices, if the float issue wasn't a big deal, we could even buy more. And we have the authority to buy more, and we'll continue to look at it. But we are obviously very aware of our investors' concern about our float, and that's why we can't buy even more shares back at this time. However, we do have the ability to do so, and we'll continue to do so when that opportunity is there. Q2 highlights, net revenue $485 million, comparable quarter of $831 million last year. Remember, $219 million of that reduction was related to a change in our accounting for MSRs, which placed reduction in fair value of MSR within revenue rather than expense. So it's really a $219 million difference there to change. Our servicing income was higher due to our growing portfolio and interest rates. income that followed our overall production volume increasing substantially over prior periods. On liquidity front, cash and cash equivalents remained over a billion dollars, which is significantly more than we operated in prior years. Mortgage loans at fair value from $7.9 billion at the year end to $12.4 billion at June 30th. This increase is due to the overall production, our entry into the PLS market, to garner better execution in certain instances than selling through agencies, as well as renewal of our jumbo loan program, which has been a huge success, doing about $2 billion plus of that production per month. Loans sold through private markets remain on the balance sheets a bit longer than we sell to agencies, but the loans remain fully hedged and are readily marketable, so we do not believe this increased our risk profile in any way materially. And an added benefit increased our net interest income, which is something you can see in Q2 compared to prior quarters. The fair value of our MSR increased from roughly $1.75 billion to $2.66 billion, as the unpaid principal balance increased from $188.3 billion to $260.3 billion at June 30th. The weighted average note rate on our mortgage service portfolio is 2.97%, as evidenced by the fact that in the last 18 months, Utah has originated over $290 billion. It's a very young book from a seasoning perspective. Credit quality is quite strong. Delinquency rates over 60 days is 1.18% down from 1.93%. In our prior call, we noted extinguish our MSR line credit and the encumbrance of MSRs, as well as issue debt to further support our investment in the business. The board of directors has approved and authorized a quarterly dividend of $0.10 per share of common A stock to shareholders of record closing business September 10th to be paid on October 6th. Our costs per loan improved to about $1,490 from 1662. This is such a key data point that people don't want to talk about, but that's 43 basis points. So when we talk about our gain on sale of 81 and our cost is around 43 base points, we can win and be profitable in all markets. These are all-time low margins, basically. And we are very profitable across the board. And with our cost to originate and our proprietary technology, we're going to continue to win with our costs. And we can continue to put pressure on all of our competition, as you saw in the second quarter, as most of our competitors went down in volume. And at the same time, some of them lost money. We succeeded and excelled because of our cost to originate and our proprietary technology. Last quarter we set guidance and did we not only set it, we set a higher guidance and we beat it across the board. We realized record-breaking numbers at UWM and we're very proud of it. The solid foundation we put in place It's producing exceptional results. Our technology platform, our operations, our team members, and what we're doing in the community, we're very, very proud of what we're doing. Liquidity is strong. The broker channel is strong, and it's getting stronger. And UWM is going to continue to get stronger as we continue to make a big impact on the broker channel and all the consumers they serve, and the realtors for that matter as well. One of the last points I wanted to leave you with is, you know, we were very, very profitable in one of the toughest market environments, trough margins, everyone else struggling. UWM, we won, and we're going to continue to win here at UWM. We're looking ahead, and we're going to guide to $57 to $62 billion from a production perspective and gain margins between 75 and 100 base points.